|[February 14, 2014]
Fitch Downgrades National Jewish Health (CO) Revs to 'BB+'; Outlook to Stable
NEW YORK --(Business Wire)--
Fitch Ratings has downgraded to 'BB+' from 'BBB-' the rating on the
following revenue bonds issued by the Colorado Health Facilities
Authority on behalf of National Jewish Health (NJH):
--$24,145,000 series 2012 fixed-rate bonds
--$11,100,000 series 2005 variable-rate demand bonds
The series 2005 bonds are secured by a letter of credit (LOC: UMB Bank,
The Rating Outlook is revised to Stable from Negative.
Pledge of gross revenues excluding restricted charitable donations and
KEY RATING DRIVERS
GROWING OPERATING LOSSES: The downgrade to 'BB+' reflects persistent
large operating losses in fiscal 2013, which weakened further through
the 2014 interim period. Operating margin was negative 4.4% in fiscal
2013 and negative 9.6% through the six-month interim period. Further
rating movement is precluded at this time given NJH's adequate liquidity
position and coverage of debt service as calculated under the Master
Trust Indenture (MTI (News - Alert)), and the joint operating agreements (JOA) underway.
HIGHLY SPECIALIZED SERVICES: NJH is a national leader in the treatment
of respiratory and related diseases with a focus on research and
teaching. Over the last five years, NJH has significantly expanded its
clinical capabilities to provide more comprehensive care to its patients
with the majority of its services currently provided in an outpatient
ADEQUATE BALANCE SHEET: Liquidity and leverage indicators are
satisfactory at the 'BB+' rating. However, a sizable line of credit is
utilized for operating expenditures, diluting NJH's overall balance
JOA WITH EXEMPLA ST. JOSEPH HOSPITAL: In September 2013, NJH signed a
letter of intent with Exempla St. Joseph Hospital (ESJH; part of Sisters
of Charity of Leavenworth, revenue bonds rated 'AA-') to form a JOA to
collaborate in providing inpatient and outpatient services. Through a
newly created not-for-profit entity, the two hospitals will provide
services at multiple locations including NJH's campus and ESJH's new
facility to be named and opened in December 2014. Fitch believes this
JOA is a favorable opportunity for NJH to grow its clinical capacity
with minimal capital outlay.
ADEQUATE MTI COVERAGE OF DEBT: The Stable Outlook is predicated upon
Fitch's expectation that NJH will continue producing sufficient net
income available for debt service as calculated under the MTI. Inability
to do so could lead to further negative rating action.
SUCCESSFUL EXECUTION OF JOA: Fitch believes the JOA with ESJH will
provide growth opportunities in NJH's clinical business, and can lead to
increased revenue growth. Effective execution leading to improved
operating profitability could result in a return to the investment-grade
NJH is a national referral medical institute engaged in patient care,
medical research, and teaching, primarily in the areas of respiratory,
cardiac, allergic, and immunologic medicine. NJH only has 46 licensed
beds and the majority of its services are provided on an outpatient
basis. The medical staff currently provides inpatient care at Denver
area hospitals. Total revenue for fiscal year ended June 30, 2013 was
$197.7 million, approximately 80% of which was generated by clinical and
Increasing Operating Losses
Operating profitability further weakened in fiscal 2013 with a negative
4.4% operating margin compared to negative operating margins of 4% in
2012 and 1.5% in 2011. Deterioration in profitability accelerated
through the six-month interim period ended Dec. 31, 2013, with a
negative operating margin of 9.6% as compared to a negative 5.5%
operating margin in the prior year period.
Historically, NJH's highly profitable clinical operations, along with
philanthropic contributions, have offset substantial operating losses
incurred by the organization's research activities. Losses from research
activities exceeded $20 million over the last several years. While
management noted various strategies are in place to bring annual losses
below $20 million, meaningful progress is not expected in the near term.
In 2013, clinical operations were negatively affected by a one-time
write-off of receivables resulting from changes in Medicare Molecular
Management is projecting profitability to improve in fiscal 2014,
supported by enhanced clinical operations and philanthropic
contributions. However, due to heightened expenditures in physician
investments nd timing of certain funds released from restriction, net
income was negative through the six-month interim period and will likely
remain weak through the end of fiscal 2014.
Philanthropy activity has been solid, with annual fundraising levels of
over $20 million. NJH is currently in the process of completing its
largest campaign yet, with the goal of raising $250 million that
includes $150 million to fund outpatient facility expansions and other
clinical and research projects.
Joint Operating Agreement with Exempla St. Joseph Hospital
In September 2013, NJH and ESJH signed a letter of intent to form a JOA
to partner in providing inpatient and outpatient care. The JOA will be
co-governed and named to reflect both the NJH and ESJH brands. ESJH is
in the process of constructing a new facility, which is expected to be
occupied by both NJH and ESJH.
Fitch believes this opportunity should yield clinical and financial
advantages to NJH, as the organization had initially planned to build an
inpatient tower to expand inpatient capabilities. This JOA will provide
the physical capacity needed for NJH. Additionally, NJH should be able
to capitalize on revenue growth opportunities by having access to a
larger network and develop a continuum of care. Research should benefit
as well through increased access to patients and clinical trials.
NJH management indicated the transaction is currently undergoing due
diligence review, with the goal of signing a definitive agreement in the
first quarter of calendar year 2014. NJH is expected to continue
operating outpatient and some inpatient programs on its existing campus
and begin admitting patients at the new facility in December 2014.
Financial reporting should remain relatively similar to prior years, as
assets and liabilities will remain separate.
10-Year Strategic Plan
NJH is continuing its strategic plan begun in 2007, which focuses on
clinical and research capabilities as well as philanthropy. NJH has
increased the depth and breadth of services offered over the last
several years, and the JOA with ESJH is consistent in executing existing
In addition, NJH is partnering with Icahn School of Medicine (SOM; part
of Mount Sinai Hospital, revenue bonds rated 'A', Stable Outlook) to
create a respiratory institute in New York City. This venture is NJH's
first major project outside of Colorado, and will be located on the SOM
campus. Fitch believes this partnership should enhance NJH presence and
brand as well as revenues and fundraising.
As of Dec. 31, 2013, unrestricted cash and investments totaled $52.1
million including available earnings from the Permanent Endowment, which
is fully accessible to NJH with board approval. Liquidity metrics
equating to 100.1 days cash on hand, 9.4x cushion ratio, and 85.4%
cash-to-debt are sound for the rating category, and provide some cushion
as NJH executes strategic plans.
Weak Debt Metrics
Total outstanding debt as of Dec. 31, 2013 was $61 million, which
included $49.2 million in bonds and capital leases and $11.8 million
drawn on an operating line of credit. Fitch is treating the line of
credit as long-term debt based on NJH's intentions to leave it
outstanding for the foreseeable future. The bonds and capital leases are
77% fixed rate and 23% floating rate. The $11.1 million series 2005
variable-rate demand bonds are supported by an LOC from UMB bank that
renews automatically (current expiration date is March 1, 2015).
Fitch used a maximum annual debt service (MADS) of $5.6 million
occurring in 2015. There is a $6.3 million bullet maturity due in 2017
related to the 2011 Gove School Property Note, which Fitch excluded for
MADS purposes due to management's stated goals to pay off the note with
fundraising and NJH's history of success with philanthropy. MADS
comprised $3.5 million for bonded debt, $980,000 for capital leases,
$780,000 for the 2011 note, and $325,000 in interest payments estimated
for the line of credit. MADS drops to $4 million in 2018. Coverage of
MADS by EBITDA was weak at 1.4x in fiscal 2013, and deteriorated
significantly to negative 0.3x in the six-month interim period (based on
While debt service coverage metrics calculated per Fitch's definition
are concerning, the MTI allows for inclusion of certain displacements of
restricted funds in net income available. In addition, coverage is
tested only on bonded debt. MADS coverage calculated under the MTI using
a MADS of $3.2 million was 6.4x in 2013 and 3.1x in 2012. MTI
calculations are performed and disclosed only on an annual basis, but
using the same methodology, management estimated MADS coverage of 2.4x
through the six-month interim period.
Modest Capital Needs
Routine capital expenditures are around $3 million-$4 million annually,
and budgeted at $4 million in fiscal 2014. Capital plans have been
scaled back due to the JOA and planned outpatient facility expansion is
contingent upon success of the capital campaign. Other capital plans
will be evaluated after the initial implementation process of the JOA.
NJH covenants to disclose audited financial statements within 150 days
of the end of the fiscal year. Quarterly unaudited financial information
is disclosed within 45 days of the close of the first three quarters of
the fiscal year and within 90 days of the close of the fourth quarter.
Financial statements are posted to the Municipal Securities Rulemaking
Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 3, 2013
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 20,
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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